Commercial Real Estate Finance TermsConditions for commercial real estate financing
I had just been released from almost a ten year period as a local taxation attorney ten years ago, mainly providing advice on real estate financing structures, and began working as a Financial Policies Officer for the British Property Federation. For me, as for the British real estate sector, the next few years would be marked by the loan crisis: those who concentrate on handling old portfolio of largely undesirable, late-cyclical Commercial Real Estate (CRE) credits and not on new business.
In 2014, in frustration at a fierce but non-coordinated response to the GFC, an industrial group ( to which I belonged) created an A Vision for Real Estate Finance in the UK reporting. The objective was to show policy-makers how to govern the sectors so that they can benefit the business community without taking unreasonable risk to fiscal sustainability.
We are making slow headway under the auspices of the Property Industry Alliance and with the support of the Bank of England, particularly in two areas. Work is underway on a new credit-level storage facility to improve the availability of information on the markets (while maintaining privacy and anonymity). At the same time, long-term value indicators are being designed and piloted to help creditors better assess cyclical risks.
However, it is a good idea to take a new look at what has and hasn't been changing in the UK CRE financial markets over the last ten years. There has been a change in the way the markets are structured, probably forever. Introducing the "slotting" stance for UK large banks' credit exposure has diminished their willingness to take risks (and their ability to compete at the most secure end of the market).
Innumerable new plattforms have arisen, often specialised in specific niche markets or policies, enabling new funding resources (often institutes more interested in returns than liquidity) to gain exposure to CREs. While this new variety of offering and policy is good for both borrower and resistance to the markets, there are two reservations.
Firstly, by promoting a process of consolidating what the major UK banking institutions are lending to, slots have certainly hampered easy entry to loans for local, smaller ticketing buyers and in specific (but important) areas such as build-to-rent. Regulatory finance may not support the policies of the governments as well as it could. Secondly, it is unfortunate that Commercial Mortgages Backed Securities have had difficulties establishing themselves as a substantial part of the CMBS markets.
Firstly, as a sovereign indebtedness commodity, CMBS provides insight into the underlying financial landscape as well as comparable and liquid assets that are not available in the retail mutual funds and syndicated loan industries. Second, by understanding the issues identified by GFC, CMBS could have developed a better real estate investor offering; instead, these buyers are making investments in a way that has not (yet) been put through its paces by a severe downswing.
Recent phases of past CRE cycle have been shaped by investor and lender focus on riskier activity - growth and new geographic marketplaces, sub-sectors and structure. Apart from the growing importance of operational risks (see more below), none of these characteristics are discernible this year.
Firstly, how much CRE credit engagement is hidden because it is reported as company credit? In the case of a real estate investment facility, slots resulted in anrbitrage in which the regulated principal costs of a facility to a real estate investment firm can be significantly higher if the facility is considered to be "special finance" (essentially non-recourse collateralised loans) than if it is considered to be a commercial facility (generally if the credit perfomance is dependent on the borrower's business).
However, for many CRE borrower, the distinction may not be so significant in terms of economics and loan technology.